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Dow Chemical's bid for the PBB in Argentina

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Introduction

Dow Chemical's bid for the Privatization of PBB in Argentina Dow should acquire PBB because the acquisition of PBB offers Dow once in the life time the opportunity to become the leading polyethylene player in Latin America. There are several reasons for Dow to become leading polyethylene player in Latin America, especially in Argentina. Firstly, rapid society transformation is taking place in Argentina. Economy is developing in a fast pace and political environment is becoming more and more stable. During the 1980s, Argentina experienced long periods of hyperinflation, stagflation, and huge fiscal deficit. Economy of Argentina started to recover after Carlos Menem took power along with his Convertibility Plan. Living standard in Argentina is anticipated to continue to improve; food, packaging industries and supermarkets sectors have experienced dramatic development since 1991, increasing demand for polyethylene. Secondly, supply of primary materials such as petroleum and gas is abundant in Bahia Blanca, and energy price in the area is low. Supply of primary materials and electricity are crucial to success of polyethylene production. Thirdly, competition of polyethylene industry in Argentina is moderate; there are only two major players in the industry, and products of the two companies are different, PBB specializes in ethylene and HDPE production, PBB's main competitor, Polisur, specializes in LDPE and HDPE production. The probability of price war is low in Argentina, and thus, revenue is relatively stable and predictable. Acquiring PBB offers Dow the opportunity to enter Argentina market, and this is the first step for Dow to take over control of Bahia Blanca's polyethylene activities. The main risks beyond the general industry risks of this project for Dow are country risks. ...read more.

Middle

14 15 16 16 0.385543 0.350494 0.318631 0.289664 0.263331 0.239392 0.217629 0.217629 65.73513 51.27726 45.94656 45.85387 48.29495 50.39203 41.00133 632.1548 Value of stage 3=903.3546 million USD In conclusion: value of stage 1=714.391 million USD Value of stage 2=363.428 million USD Value of stage 3=903.3546 million USD Total value for the project=714.391+363.428+903.3546=1981.166 million USD. Given that the project is located in Argentina, a 10% percent discount rate is not the appropriate rate for valuing the project. 10% discount rate is the capital cost for similar U.S based projects. When the project is located in countries other than the U.S., a different discount rate should be used in compensate for different country risks. U.S is the most developed country in the world with well established political, economic and financial system. Political environment is relatively stable, and chances of economic or financial crisis are low compared to other nations, especial developing nations. If the project is located in Argentina, we should take Argentina's country risks into account when determining what discount rate should be used. Normally, discount rate in Argentina should be higher than that in the U.S due to higher country risks in Argentina. Country risks consist of three different types of risks, political risks, financial risks and economics risks. During the past decade, political environment in Argentina has been relatively stable, the democratic government remained in power for 12 years and no expropriation had been reported for the previous 50 years. Although the political system seem to be stable in Argentina, political risks of Argentina is still relatively high compared to political risks in the U.S. ...read more.

Conclusion

43.2 44.1 36.1 Plus: Depreciation 2.1 4.3 4.9 5.6 6.4 7.1 4.4 5.9 6.5 Less: Change in working capital (20% of sales) 44.5 -1.8 3.8 -3.3 -3.2 3.9 6.5 7.4 -7.5 Less: Investments - 10.1 6.8 7 7.3 14.6 15.4 5.5 5.7 CASH FLOW POLYETHYLENE - Stage 2 8.1 39.8 39.5 45.6 42.8 28.2 25.7 37 44.3 discount factor 0.8264463 0.6830135 0.5644739 0.4665074 0.3855433 0.3186308 0.2633313 0.2176291 0.1798588 pv of cash flow 6.6942149 27.183936 22.29672 21.272737 16.501253 8.9853891 6.7676132 8.052278 7.9677444 2004 2005 2006 2007 2008 2009 2010 terminal 29.3 26.5 26.1 26.8 29.8 31.4 28.3 7.1 7.7 8.3 9 6.8 6.9 7 -6.1 -3 1.3 3.6 4.7 4.7 -4.2 5.9 6.1 6.3 6.4 6.6 6.7 6.9 36.6 31.2 26.8 25.7 25.3 26.9 32.6 190.25876 0.1486436 0.122846 0.1015256 0.0839055 0.0693433 0.0573086 0.0473624 0.0473624 5.4403568 3.8327944 2.720886 2.1563701 1.7543867 1.5416001 1.5440156 9.0111191 Total value of stage 2 is 153.7234 million. Stage 3: CASH FLOW ETHYLENE PLUS POLYETHYLENE - Stage 3 1997 1998 1999 2000 2001 2002 2003 2004 Cash flow - ethylene - Stage 3 -4.5 -50.1 -247.7 -68.1 101.8 151.3 121.7 90 Cash flow - polyethylene - Stage 3 -30 -70 -60 17.9 66.8 83.9 80.4 TOTAL CASH FLOW - Stage 3 -4.5 -80.1 -317.7 -128.1 119.7 218.1 205.6 170.5 discount factor 0.564474 0.466507 0.385543 0.318631 0.263331 0.217629 0.179859 0.148644 pv of cash flow -2.54013 -37.3672 -122.487 -40.8166 31.52075 47.46491 36.97897 25.34374 2005 2006 2007 2008 2009 2010 terminal 69.5 71 85.5 109 133.1 101.4 76.8 73.2 72.8 74.3 77.3 87 146.3 144.2 158.3 183.4 210.5 188.4 1099.532 0.122846 0.101526 0.083905 0.069343 0.057309 0.047362 0.047362 17.97237 14.63999 13.28223 12.71757 12.06345 8.923084 52.07653 Total value in stage 3 is 69.7723 million. ...read more.

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